Yen Set for 11th Weekly Drop; Japan Records Largest Trade Deficit in History

The yen headed for a record stretch of weekly losses against the dollar as data showing a decline in Japanese consumer prices added to the case for further monetary stimulus from the central bank.

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The Bank of Japan announced open-ended easing and a 2 percent inflation target this week. The Japanese currency remained weaker after touching a 2 1/2-year low as Governor Masaaki Shirakawa said he will make “considerable efforts” to reach the price target. The Dollar Index rose before U.S. data forecast to show home sales increased.

Consumer Prices

Japanese consumer prices excluding fresh food fell 0.2 percent in December from a year earlier, the statistics bureau reported in Tokyo today, the seventh decline in eight months.

Prime Minister Shinzo Abe, who took office last month, has called for “bold monetary policy” to beat deflation and drive the yen lower. The BOJ on Jan. 22 doubled its inflation target to 2 percent and announced open-ended asset buying from 2014.

BOJ board members said Japan’s economy is weakening and the central bank will continue with “powerful” monetary easing, according to the minutes released today of the December meeting when it expanded its asset-purchase program by 10 trillion yen ($110 billion).

Shirakawa reiterated in remarks in Tokyo today that while the central bank is conducting aggressive easing, achieving the price-gain target isn’t easy.

Japan’s trade deficit nearly tripled in 2012 to Y6.93tn ($77bn), an unprecedented shortfall for the traditional export powerhouse that could colour debate about the so-called currency wars as Tokyo pursues policies that push down the value of the yen.

The sharp expansion of the deficit, from Y2.56tn in 2011, is a reminder of the increasingly complex challenges facing Japan’s economy and its new government, which has promised aggressive measures to end a two-decade malaise.

The monetary shift was crystallised on Tuesday when the BoJ set a target of 2 per cent inflation, but has alarmed some of Japan’s trading partners. Germany, the UK and China have warned that efforts to weaken the yen could lead to a spiral of competitive devaluations among major economies – a so-called currency war.

On Thursday Mr Abe said the government would continue to consider a possible revision to the Bank of Japan law to ensure the central bank keeps easing monetary policy.

“Given the need for continued bold monetary easing, I want to keep in mind” the potential legal revision, Mr Abe said in an interview with Kyodo News.

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Thursday’s trade data highlighted just how sharply the country’s global trade position has deteriorated. In December, exports were down 5.8 per cent compared with the same month a year earlier, while imports rose 1.9 per cent.

Exports to China, where some consumers have been shunning Japanese products amid an international dispute over control of islands in the East China Sea, fell 15.8 per cent, but shipments to Europe and the US were also down.

Currency Wars

Without a doubt, currency wars have ramped up to a new high. It’s hard to say when or where this stops, but those who thought Shinzo Abe was bluffing, need think again.

However, and as I have said repeatedly, a weaker yen will not do Japan any good.

There is every potential for the decline in the Yen to quickly get out of control, and I suspect it will. When it does, Abe may not be able to stop a devastating slide that is likely to harm consumers more than it helps Japanese manufacturers.

1 Comment for “Yen Set for 11th Weekly Drop; Japan Records Largest Trade Deficit in History”

A huge chunk of the trade imbalance negatively afflicting Japan, the US and Euro zone countries can be laid squarely on trade and investment policies relating to China, which enable those at the top to earn record bonuses and salaries while shifting national production and millions of jobs there–and with enough left to buy off our politicians to sign off on more. Also, does anyone question why China is still allowed to commonly impose 100% tariffs on imports while concurrently experiencing the largest trade surpluses of any country in world history, while still freely engaging in an absolutely massive degree of counterfeiting, illegal copying, patent infringement and bribery of foreign diplomats, bureaucrats and politicians?

I really don’t care though, since my job was outsourced to China I don’t need to work or pay taxes, and fortunately we can take the money from education to pay for my new life on the dole.